Ontario Introduces New Law on Liability for Public Company Disclosure Effective December 31st, 2005
Investors currently have remedies under the Ontario Securities Act (the “Act”) regarding the purchase of securities under a prospectus, where a misrepresentation has been made in the prospectus. Effective December 31st, 2005, investors purchasing securities on the secondary market (such as the Toronto Stock Exchange), will also have a statutory right of action for damages against responsible issuers,1 their directors, responsible officers, controlling shareholders, promoters, auditors and others operating in Ontario’s capital markets for misleading, insufficient, or untimely disclosure.
The addition of amendments to the Act providing for civil liability for secondary market disclosure reflects the general desire to bolster investor confidence and protection measures in Canadian capital markets by providing public companies with strong incentives to disclose accurate and complete information.
Liability for Secondary Market Disclosure
A disclosure violation is triggered when a misrepresentation about the issuer is made in:
- Public documents released by a responsible issuer or a person or company with authority to act on behalf of a responsible issuer.
- Public oral statements made by a person with authority to speak on behalf of a responsible issuer.
Or through:
- The failure by a responsible issuer to make timely disclosure of a material change in its affairs.
A person or company who acquires or disposes of an issuer’s security during the period where there is a continuous disclosure violation (the period of time between the time when the disclosure violation first occurred and the time when the disclosure violation was publicly issuer with a real and substantial connection to Ontario, any securities of which are publicly traded.
corrected) has a statutory right of action for damages irrespective of whether the person or company relied on the misrepresentation.
A person or company is not liable if that person or company can prove that the investor acquired or disposed of the issuer’s security with knowledge of the disclosure violation.
Potential Defendants
As a result of the Act’s new civil liability for secondary market disclose regime, all responsible issuers in Ontario, directors, responsible officers, influential persons2 and experts3 may be liable to investors in accordance with the limits and qualifications described below. No action may be commenced without leave of the court. The court will grant leave only where it is satisfied that the action is being brought in good faith and there is a reasonable possibility that the action will be resolved in favour of the investor.
Damages
Damages will generally be quantified as the difference between the price of the securities at the time when the disclosure violation (the misrepresentation or failure to make timely disclosure) was outstanding and the price of the securities after the misrepresentation or failure to make timely disclosure was rectified. Assessed damages will not include any amount that the defendant can prove is attributable to a change in the price of the securities that is unrelated to the misrepresentation or the failure to make timely disclosure.
Under this new regime, the extent of liability attributed to responsible issuers and their directors and officers will be subject to the following limitations: * table missing
Both multiple misrepresentations having common subject matter or content and multiple instances of failure to make timely disclosure of a material change or changes concerning common subject matter may in the discretion of the court, be treated as a single misrepresentation or single failure to make timely disclosure.
However, these limits do not apply to a person or company (other than the responsible issuer) if the investor can prove that the person or company knowingly authorized, permitted or acquiesced in or influenced the disclosure violation. A person or company (other than the responsible issuer) who knowingly violates the legislation may be jointly and severally liable for the full amount of all damages.
Moreover, along with the new civil liability provisions for secondary market disclosure, the Act has been amended to include new offences relating to fraud and market manipulation, as well as the making of misleading and untrue statements.
Determination of Liability
The burden of proof and defences to allegations of a disclosure violation are determined with reference to the type of secondary market disclosure at issue (or failure to make proper disclosure) and the responsible person involved.
*table missing
Due Diligence
A person or company will not be liable in an action if the person or company can prove that, after a reasonable investigation, the person or company had no reasonable grounds to believe that a misrepresentation had been made or that there had been a failure to make timely disclosure (commonly referred to as the “due diligence defence”)
In determining whether the defendant’s investigation was reasonable, or whether any person or company is guilty of gross misconduct, the court will consider “all relevant circumstances”, including the following, among a list of specified factors:
- The existence, if any, and the nature of any system designed to ensure that the responsible issuer meets its continuous disclosure obligations.
- The reasonableness of reliance by the person or company on the responsible issuer’s disclosure compliance system and on the responsible issuer’s officers, employees and others whose duties would in the ordinary course have given them knowledge of the relevant facts.
Forward-looking information 5
- A person or company is not liable in an action for a misrepresentation in forward-looking information if the document or public oral statement containing the forward-looking information:
- Used reasonable cautionary language identifying the forward-looking information.6
- Identified material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information.
- Contains a statement of the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection set out in the forward-looking information.7
The person or company must also demonstrate a reasonable basis for drawing the conclusions or making the forecasts and projections set out in the forward-looking information.
Importantly, none of the above relieves a person or company of liability respecting forward-looking information in a financial statement required to be filed under the Act, or forward-looking information in a document released in connection with an initial public offering.
Conclusion
These amendments represent an important change to securities law in Ontario and will require heightened scrutiny by issuers regarding their corporate disclosure practices. As a result, we urge you to carefully consider the implications of these significant reforms as they apply to both you personally, as well as any public entities with which you are affiliated. Going forward, effective internal controls and procedures must be in place in order to mitigate or avoid liability under this pending legislation
1 A “responsible issuer” means a reporting issuer in Ontario or any other issuer with a real and substantial connection to Ontario, any securities of which are publicly traded
2 “Influential person” means, in respect of a responsible issuer, a control person, a promoter and insiders who are not directors or senior officers of the responsible issuer, and an investment manager if the responsible issuer is an investment fund.
3 “Expert” means a person or company whose profession gives authority to a statement made in a professional capacity by the person or company including, without limitation, an accountant, actuary, appraiser, auditor, engineer, financial analyst, geologist or lawyer, but not an entity that is an approved rating organization.
4 A material change report is a core document for, among others, the
responsible issuer or an officer of the issuer. It is not a core document for
a director of the responsible issuer who is not also an officer of the issuer.
5 'Forward-looking information' means all disclosure regarding possible events, conditions or results that is based on assumptions about future economic conditions and courses of action and includes future oriented financial information with respect to prospective results of operations, financial position and cash flows that is presented as either a forecast or a projection.
6 Such language must be placed close to the forward-looking information in both the document or public oral statement.
7 In the case of public oral statements, the person or company must state that additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclustion or making a forecast or porjection in the forward-looking information, is contained in a readily-available document or in a portion of such document and has identified that document or that portion of the document.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation. If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.